RIL- RCom deal: How it impacts the telecom space

Reliance Communications shares have been on fire since the announcement of a fibre optic network sharing deal with Reliance Jio Infocomm, a unit of Reliance Industries. RCom shares rose 18 per cent over the last week against a 1 per cent fall in the BSE Sensex. Under the deal terms, RIL, controlled by Mukesh Ambani, will pay Rs 1,200 crore to younger brother Anil Ambani's RCom for use of its fibre optic network.

Here's how the deal can impact Indias telecom space:

Bigger deal in the offing: Further collaboration between RCom and RIL, as their statement indicated, will create another well-funded player in the market with networks, distribution, customers, spectrum and importantly, cash flows, global brokerage Nomura says. A tower-sharing deal between RIL and RCom appears more likely than before, Bank of America Merrill Lynch says.

Faster rollout of 4G services: Reliance Industries made a dramatic return to telecom in 2010 by becoming the only company to gain nationwide 4G airwaves. The collaboration with RCom could benefit RIL in terms of accelerating the 4G rollout, global brokerage Nomura says. RIL is widely expected to begin operations in parts of India later this year. The deal will help Reliance Jio Infocomm "reach the market faster," said Deven Choksey, managing director of K.R. Choksey Securities.

Deleveraging RCom: Reliance Communications is the most leveraged among Indian mobile carriers with net debt of nearly $7 billion (nearly Rs 40,000 crore), or more than five times its annualised operating profit. The company has been looking to sell assets to cut its debt load but has fallen short in several attempts. The current deal with RIL will marginally reduce RCom's net debt to EBITDA (a key operating benchmark) from 5.7-times to 5.5-times. RIL is a net cash company and further deals will help deleveraging RCom's balance sheet.

Wait and watch for investors: Both Bharti Airtel and Idea Cellular have fallen sharply since the deal was announced. Having another viable and well-funded pan-India telecom operator is hardly good news for existing operators, Nomura says, advising investors to stay away from putting any fresh capital into these stocks.